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A Supplemental Executive Retirement Plan (SERP) is a type of non-qualified retirement plan offered to executives as a long-term incentive. Generally speaking, SERPs differ from qualified retirement plans like the 401(k) in that they provide no immediate tax advantages to either the company or the executive.
Unlike qualified plans, which offer an income tax deferral, benefits paid out as part of a SERP are not deductible for the company. Companies fund these plans with an immediate cash outlay. That is why, for some employers, SERPs are a very attractive form of compensation. Rather than simply offering their executives higher salaries, employers can provide them with incentives to stay with their organizations, but without the immediate tax implications associated with salary increases.
In exchange for their current out of pocket investment, the employer is rewarded with the assurance that a top-level executive will remain with their organization for the duration of his or her SERP contract. This reduces the potential for disruption caused by the departure of high-level executives, while also providing the executive with long-term security, oftentimes at a higher cost of living than otherwise possible.
The SERP benefits typically consist of a lump-sum payment or a series of cash payments made upon retirement, death, or disability, depending on the terms of the plan. The executive may also be eligible for additional benefits such as hospital, medical, dental, or vision care. When paid, the company deducts these benefits as a business expense and the executive does not pay any taxes until the benefits are received.
SERPs may be funded by the company, by an insurance contract, or self-funded. Depending on the nature of the plan, the employer will ensure that the SERP is fully qualified, legal, and that the contributions they make to the plan meet the relevant regulatory requirements.
Because SERPs are not qualified plans, employers often have more flexibility in creating their plan design and benefits than with a qualified plan. This allows employers to offer customized retirement plans that specifically address their executives’ unique needs and objectives. As such, employers should take the time to research and develop SERPs that benefit their executives and their organizations.
Unlike qualified plans, which offer an income tax deferral, benefits paid out as part of a SERP are not deductible for the company. Companies fund these plans with an immediate cash outlay. That is why, for some employers, SERPs are a very attractive form of compensation. Rather than simply offering their executives higher salaries, employers can provide them with incentives to stay with their organizations, but without the immediate tax implications associated with salary increases.
In exchange for their current out of pocket investment, the employer is rewarded with the assurance that a top-level executive will remain with their organization for the duration of his or her SERP contract. This reduces the potential for disruption caused by the departure of high-level executives, while also providing the executive with long-term security, oftentimes at a higher cost of living than otherwise possible.
The SERP benefits typically consist of a lump-sum payment or a series of cash payments made upon retirement, death, or disability, depending on the terms of the plan. The executive may also be eligible for additional benefits such as hospital, medical, dental, or vision care. When paid, the company deducts these benefits as a business expense and the executive does not pay any taxes until the benefits are received.
SERPs may be funded by the company, by an insurance contract, or self-funded. Depending on the nature of the plan, the employer will ensure that the SERP is fully qualified, legal, and that the contributions they make to the plan meet the relevant regulatory requirements.
Because SERPs are not qualified plans, employers often have more flexibility in creating their plan design and benefits than with a qualified plan. This allows employers to offer customized retirement plans that specifically address their executives’ unique needs and objectives. As such, employers should take the time to research and develop SERPs that benefit their executives and their organizations.